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Rent review issue

05-01-2019, 23:25 PM

I have a tenant on a lease with a five year term on a commercial property. The lease specified a rent review after 2,3 and 4 years. The lease also specified that the rent review should be determined by the RPI index and it specifies the mechanism for doing this. I duly calculated the rent review on the second anniversary and then sent the tenant a letter specifying the increase which amounted to about 6% as it calculates it against the base month which was effectively at the start of the lease. So essentially it is 3% for each year passed. The tenant responded to me and told me I had no right and should not conduct a unilateral rent review.

He has said that I have to employ an impartial rics surveyor to determine the rent review. However, that is not my understanding. I have consulted the firm of solicitors that drew up the lease(waiting for reply) but would appreciate any expert view from forum members. In the lease there is mention of what should be done in terms of a rent review dispute. However, I can’t see this applies in this case as I have applied exactly the terms of the rent review and calculated it correctly and communicated it to the tenant as specified. Surely if they signed the lease agreeing to the rent review periods and for these to be calculated against rpi and of this has been actioned correctly they don’t have a leg to stand on? Thoughts?

It comes down to precisely what the lease says. A standard RPI clause will simply provide for the increase to happen automatically. That is not a unilateral increase as the tenant has already agreed it. One of the reasons RPI clauses are used is to avoid having to agree a revised rent.

Comment

In my experience, it is not unusual for an RPI rent review to including a mechanism for a third party to determine the increase in the event of dispute. If the the op's lease contains such. then the tenant is right in his contention, presupposing the tenant doesn't agree with the op's calculations. Referral whether or not in agreement may be the tenant's right but would seem ott for what is intended to be a formula review.

If the dispute procedure also entitles the third party to determine on costs then I suggest the op makes a Calderbank offer to protect the op's interest on costs; the rental offer should be the RPI rent increase. A covering letter (without prejudice) explaining to the tenant that if the tenant doesn't agree the RPI calculation then the tenant should provide his computations for checking; also that if the review cannot be agreed per the formula to which the tenant has already agreed then the dispute procedure would be initiated, the tenant should be told that the tenant would be liable for the extra costs. (if however the third party is an Independent Expert and under the lease is not authorised to determine costs then the op (as applicant for the appointment procedure) would have to bear the costs.

Comment

What the tenant is saying is that a surveyor needs to be instructed. A surveyor is not needed because no valuation is required. If the RPI clause is properly drafted then there is only one answer. What the RPI is at the relevant dates is fixed and ascertainable. The only possible dispute is whether the calculation is correct. An RPI clause is no different in principle from a clause which says the rent increases by x amount, it just has slightly more complex arithmetic.

Comment

Thanks for answering on this. Below are the relevant clauses of the lease. Regarding the calculation it has been done exactly as specified and sent to the tenant as soon as I was able to do so. Which was approximately 1 month prior to the increase taking effect.

I think the tenant has ignored this and has instead focussed on clause 7.9 which suggests he may be able to dispute under any circumstances. However surely the intention of that clause is for it to be used only if there is a problem with the calculations or if the RPI index used ceases to exist.

————
7.3 The indexed rent for a Review Date shall be determined by multiplying the Base Rent by the All Items index value of the RPI for the month two months before the month in which that Review Date falls, then dividing the product by the All Items index value of the RPI for the RPI for the Base RPI Month.
7.4 The Landlord shall calculate the indexed rent as soon as reasonably practicable and shall give the Tenant written notice of the indexed rent as soon as it has been calculated.

7.9 The Surveyor shall determine a question, dispute or disagreement that arises between the parties in the following circumstances:
(a) where any question or dispute arises between the parties as to the amount of the Annual Rent payable or as to the interpretation, application or effect of any part of this clause 7; or
(b) where the Landlords and the Tenant fail to reach agreement under clause 7.8,

The Surveyor shall have full power to determine the question, dispute or disagreement, and shall have power to determine any issue involving the interpretation of any provision of this lease, his jurisdiction to determine the question, dispute or disagreement referred to him or his terms of reference. When determining such a question, dispute or disagreement, the Surveyor may, if he considers it appropriate, specify that an alternative mechanism for setting the Annual Rent should apply to this lease, and this includes (but is not limited to) substituting an alternative index for the RPI.
————

The tenant is now telling me that i have a legal obligation to appoint the surveyor and as I have told them I’m not willing to do this they have told me they have instructed solicitors to terminate the lease.

Regarding instruction of surveyor. Relevant clause below:

————
7.14 The fees and expenses of the Surveyor and the cost of the appointment of the Surveyor and any counsel's fees, or other fees, reasonably incurred by the Surveyor shall be payable by the Landlord and the Tenant in the proportions that the Surveyor directs (or if the Surveyor makes no direction, then equally). If the Tenant does not pay its part of the fees and expenses of the Surveyor within ten working days after demand by the Surveyor, the Landlord may pay that part and the amount it pays shall be a debt of the Tenant due and payable on demand to the Landlord. The Landlord and the Tenant shall otherwise each bear their own costs in connection with the rent review.
—————

I have also instructed solicitors to advise on this matter. Will let you know their view when they respond To me. Thanks for your input. Much appreciated.

Comment

It appears to me that they can insist on appointing a surveyor, but this would seem pointless unless there is a very good reason for RPI not being reasonable. They risk having to be pay up to 100% of the surveyor's fees.

If they cannot come up with a valid reason for something other than RPI, the surveyor is, at least going to allocate 50% of their costs to the tenant, and may well decide the request is sufficiently vexatious to allocate 100%.

However, it does seem that you have a disputes relating to both the rent and to the interpretation of clause 7, so the surveyor does need to be brought in.

Has the tenant given any reason why they think RPI is too much? (Do you have any reason for arguing that it is too little?)

Comment

7.7 Subject to clause 7.8, if there is any change to the methods used to compile the RPI, including any change to the items from which the All Items of the RPI is compiled, or if the reference base used to compile the RPI changes, the calculation of the indexed rent shall be made taking into account the effect of this change.
7.8 The Landlords and the Tenant shall endeavour, within a reasonable time, to agree an alternative mechanism for setting the Annual Rent if either:
(a) the Landlords or the Tenant reasonably believes that any change referred to in clause 7.7 would fundamentally alter the calculation of the indexed rent in accordance with this clause 7, and has given notice to the other party of this belief; or
(b) it becomes impossible or impracticable to calculate the indexed rent in accordance with this clause 7,

Comment

The quoted extracts do not state whether the surveyor is to act as an arbitrator or Independent Expert. Likely the meaning of 'surveyor' would be found elsewhere in the lease; also in what capacity the surveyor is to act.

I reiterate my comment above, except that the Calderbank should state that if the RPI rent increase per the calculations at £x rent is not accepted by the specified date then the tenant is to be responsible for all costs of the third party.

If the meaning of 'surveyor' per the lease is an arbitrator then clause 7.14 would not apply as any agreement to pay costs is void under Arbitration act 1996 , in which case you could throw the book at the tenant, so to speak, to include the landlord's costs including legal costs as well.

Comment

Unfortunately the draftsman has got it all a bit round his neck. He should never have provided for the surveyor to do so much. His role should have been clearly restricted to (a) deciding what the rent should be only if the RPI changes or is abolished and (b) (possibly) settling any dispute as to the application of clause 7.3. The basic provision is 7.3. Much of the rest is what happens if the rent cannot be calculated in accordance with clause 7.3. Clause 7.4 is a bad idea. The drafting should simply make the increase automatic. Clause 7.4 creates doubt as to what happens if the notice is never served or served after the review date or if the calculation is incorrect. We have a classic case of unnecessary complication.

One of the main objectives of having an indexed link rent increase is to avoid the expense of employing professionals and drawn out negotiations. Calderbank offers should not be coming into it .There is no question of negotiating here. Assuming the whole clause is clear, either your calculation is right or wrong. The position is no different from a lease which says the rent increases by £1000. If the starting rent is £5000 then the revised rent is £6000. You do not negotiate if the tenant says he thinks it should be £5900 or wants a surveyor to do the calculation. You do not make a Calderbank offer, you insist the rent is £6000.

Comment

It seems to me that the purpose of the surveyor is to impose a limit on the litigation in any dispute, rather than to be part of the normal process. In fact 7.8 seems to require an attempt to come to a decision without a surveyor.

The surveyor's decision is binding, so there is no need to go to court.

Comment

If there is no dispute as to the way in which the rent is to be calculated there should be no role for the surveyor. Unfortunately there is because of the wording. It is as if in my simple lease the tenant says I do not agree that 5000 + 1000 = 6000 - I want the surveyor to settle the rent. All the surveyor can do is add 5000 to 1000 and make it 6000.

With a standard review to market rent if the rent has not been agreed or determined in the absence of agreement, the landlord cannot go to court and sue for an increase. The court has no power to determine the rent as it can only be determined by the procedure set out in the lease. However, if the rent is determined according to a formula and all the ingredients are known the landlord (assuming he has complied with any notice requirements) can sue for the increase. The judge can assess if the formula has been correctly applied.

Comment

The issues here are becoming muddled. My suggestion of a Calderbank is relevant. The tenant is disputing the landlord's right to unilaterally impose a revised rent per RPI and wants the rent to be referred to a impartial surveyor. The tenant's interpretation is wrong but nevertheless the basis for the dispute. The surveyor's role is stated in the lease - to date, the op has not clarified in what capacity the surveyor is to act - and the fact that the lease authorises the surveyor to do more than a simple calculation is irrelevant. In my experience, it is not unusual for a lease to provide for disputes in interpretation of the lease to be referred to a surveyor.

The purpose of the Calderbank is to protect the landlord's interest on costs should the review be referred to the third party. Provided the landlord has calculated the RPI correctly the landlord should have nothing to lose by allowing the referral. Without a Calderbank the landlord could end up paying costs for something that were it not for the tenant's intransigence would be a straightforward calculation.

Comment

Appreciate everyone’s comments on this matter. I am waiting to hear from my solicitor. Although it is same firm that drew up the lease so I doubt they will agree it is badly written. To me it looks like the whole clause was copied from a lease with a rent review based on market rate review. As such the other relevant clauses should have been cleaned up to reflect the change to RPI. However, despite the fact that the lease may well allow a surveyor to review. My expectation would be that he should think the increase is entirely fair and he should award all costs to be paid by the tenant as it is a spurious review.

Comment

Appreciate everyone’s comments on this matter. I am waiting to hear from my solicitor. Although it is same firm that drew up the lease so I doubt they will agree it is badly written. To me it looks like the whole clause was copied from a lease with a rent review based on market rate review. As such the other relevant clauses should have been cleaned up to reflect the change to RPI. However, despite the fact that the lease may well allow a surveyor to review. My expectation would be that he should think the increase is entirely fair and he should award all costs to be paid by the tenant as it is a spurious review.

I think your assessment of the drafting is pretty much spot on. However, from what I have seen, I would not say that it is fatal to your case, rather that it confuses the issue somewhat.

Whilst loosely any change in rent under a lease may be referred to as a "review" you do not really have a review here as the amount of the rent is not being reconsidered, but increased in accordance with a formula the ingredients of which are not subject to assessment or negotiation.

I was never a litigator and am no expert on the finer points of Calderbank letters. I do know though that a Calderbank letter needs to comply with certain requirements and that one of them is that it contains a genuine compromise. Compromise is not applicable here because what you want is what the lease says you get. If you want what the lease says you get you cannot send a Calderbank letter because you are not offering a compromise. What you can do is to suggest to the tenant that the position is clear and that if it goes to court you will ask for your costs to be paid on an indemnity basis as his defence will be wholly without merit - but really such letters ought to be left to litigators.

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